Angel Investors from the Entrepreneur’s Eye: Harvesting

This post concludes my series of blogs on my reading, Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson. Which brings us to the last and final fundamental of early-stage investing, harvesting.

For angel investors, the harvest is essentially the exit.

When I sat down to write this blog, I was not really sure which way I wanted to take it. Per usual I really want you as the current or future entrepreneur to understand how to look at this fundamental in a way that benefits you.

In my external reading I found an article by Venture Giants (VG) that posed a great question. “What would be your answer if an Angel Investor asked you how he/she could exit from your business angel investment in the future?

VG suggests that you should already know the answer to this question before you even throw your elevator pitch at a potential angel investor. I agree. How an angel investor is going to exit can affect the entire deal.­ Think about it, if this fundamental is part of the reading for angel investors, then it is understandable that they would want to know how it is all going to play out for them in the end…from the beginning. They will expect to see an exit strategy according to VG. You as an entrepreneur should also have a fine understanding of harvesting and the exit from where you stand and be sure that you and the angel investor are on the same page.

Angel investors will not only want to know the how of the exit, but also the when, the how long. You should also have a good idea of what your growth potential and plans are when you are calculating the “how long”.

There are several different exit opportunities that you can offer to your angel investor. Will you want to sell your company? Perhaps a partial sale. There is also the option of an initial public offering or IPO or stock where you would take your business public, to name just a few. There are also negative harvests and exits, such as a bankruptcy or what Amis and Stevenson refer to as, total annihilation. I think it is very important for entrepreneurs to understand the many different outcomes and possibilities before they even have an initial meeting with an angel investor. Knowledge and education is key and it is pertinent that you are realistic in what the future could be by doing all of your research, getting the numbers, and really having a road map of what your venture looks likes from every single angle.

I would recommend looking into Venture Giants article as there are some great links to other articles that will help you to craft an elevator pitch as well as provide info on looking at your growth strategy and expansion.

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

What is your proposed Exit Strategy for an Angel Investor? (n.d.). Retrieved from Venture Giants: https://www.venturegiants.com/news-channel-344-what-is-your-proposed-exit-strategy-for-an-angel-investor.aspx

Angel Investors from the Entrepreneur’s Eye: Supporting

This is the second to the last entry in my series of blogs on angel investing. I have been nose deep in Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson. This particular installation brings us to the sixth fundamental of early-stage investing, supporting.

Angel investors can provide more than just financial support via capital investments. Supporting takes into consideration what level of participation or role an angel is to play in an investment deal. This is where it can prove important for the angel investor you are working with to have experience working in your industry or working with similar ventures. According to authors Amis and Stevenson, some investors seek out and choose opportunities that need a lot of support, and then take on participation roles that address the needs and wants of you, the entrepreneur, your business, and themselves.

What I found odd in this section is that Amis and Stevenson talk about the “five” participation roles in Chapter 43, but they actually list six roles. Nevertheless, what I really want to deliver to you is the short and quick on what support angel investors can provide for you, the entrepreneur. In my reading and research on the particular fundamental, I found an article by the IESE Business school on Entrepreneur about the six supporting roles which lines up directly with Amis and Stevenson’s work.

Silent

A silent investor makes their financial contribution and stays out the way with no involvement. This type of investor will support you in a monetary manner but will keep their hands out of your business while they wait for their return on investment. For entrepreneurs who want to keep control of their business, working with an investor who plays this role could be very beneficial.

Reserve Force

The reserve force investor will step in where needed and will help you when you ask for their assistance and support. Otherwise these investors will be waiting in the wings.

Team Leader

Angel investors that take on the lead of team leader are very active and can take on a full or part time role. Here, you have to be careful as a business owner as investors can become overbearing or begin to micro-manage especially if the investor has a huge investment in your business.

Lead

The lead role is taken on by an investor that either contributes the majority of capital or if they bring other investors in after them. A lead investor can have a heavy influence on other investors joining in. It is very important for you to understand who your lead is as they have a major impact in a lot of areas.

Coach

An angel investor that takes on the coach role will mentor the entrepreneur. Amis and Stevenson say this is the highest impact investor who does not actually control the company. I feel that this type of investor could prove beneficial for small business owners. They will give advice and support to the entrepreneur but remain on the sidelines.

Controlling Investor

A controlling investor will take control of the deal and in managing the company. An entrepreneur that wants to have control of their company would never want to enter into a deal with an angel investor looking to take on this role.

From the entrepreneur’s standpoint, it is very important for you to understand the different roles that an angel investor can take and even more important for you to make sure that you understand what role the investor you enter a deal with is going to take in your business.

 

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

School, I. B. (2015, 10 16). The Seven Secrets Of Top Angel Investors. Retrieved from Forbes: https://www.forbes.com/sites/iese/2015/10/16/the-seven-secrets-of-top-angel-investors/#6b30ee256eae

 

Angel Investors from the Entrepreneur’s Eye: Structuring

In Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson I have made it to the sort of halfway point of the seven fundamentals. That lands us right at structuring.

Amis and Stevenson go into great depth about the different options that angel investors may seek in the structuring of deals… However, as always, I want to look at the concept in a way that helps the entrepreneur but that still provides enough information about the other side, the angel investors. Most importantly, I want to be able to give you the breakdown and facts in a quick, easy to read, and easy to absorb sort of fashion. In short, not convoluted.

According to Asheesh Advani of Entrepreneur, we should be sure when structuring a financial deal with angel investors that we are careful to not agree with terms that may put limitations or restrictions on our future ability to grow our companies or make our company unattractive to other angel investors.

Keep in mind that the terms that are set by the first investor during a financial round will remain for that entire round as well as have a heavy influence on the terms of future rounds. Structuring in a way that heavily benefits the investor without consideration of what is best for you and your company could leave things unbalanced could prove detrimental and harm your business.

Advani provides a few tips and things to keep in mind as an entrepreneur working on structuring a deal.

  • Remember, what you do for the first investor can greatly influence what you must do for future investors or what they may want in their deals as well. Advani says that you should avoid giving pro-rata rights to your first investors. These pro-rata rights say that the angel investor has the right to keep ownership in your business through future rounds. Other investors may also request these rights if you open up that door early on.
  • You must also be careful by avoiding giving up too much control. Giving too many rights to your first investor can be a major headache when it comes to your ability to make financial or managerial decisions later on.
  • Angel investors may attempt to instate limits on how much you can pay your management team. This may hinder your ability to make decisions to hire on senior management members with attractive compensation. Avoid allowing them to set these types of limits. Advani states that a solution to this potential roadblock would be agreeing with your investor to allow for a compensation committee and to consider salaries part of your overall budget.
  • You can also request a cure period. A cure period would allow you a certain amount of allotted time to review any covenants or representations that relate to legal agreements or to the compliance of any laws or state licensing and regulations. This would give you time to make sure that all of your ducks are in a row. Advani recommends this two to four week cushion.
  • Traditionally you would not have to worry about restricting your share restrictions. However, Advani says that angel investors and angel investor groups are now insisting on these restrictions. Unrestricted share though can be more attractive to future or potential investors.

Overall the most important takeaway is that you should certainly be educated and aware during the structuring stage of angel investing as an entrepreneur. The biggest awareness should be in ensuring that you and your business are not being given the short end of the stick, especially when it comes to the amount of control that remains when you are bringing angel investors into the equation. You especially want to make sure that the decisions that you make today will not harm your business’ growth and overall standing in the future.

Advani, A. (n.d.). Raising Money From Informal Investors. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/168860

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

 

 

Angel Investors from the Entrepreneur’s Eye: Valuing

“Valuation is what you are willing to exchange for something else that you want.”

If you’ve been following along with my blogs, well that’s great. Thank you. If this is your first read then I’ll fill you in. I am currently reading Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson and a ton of different articles here and there on entrepreneurship and angel investing.

This post, in particular, is in response to the book’s section on valuation.

Here again, I want to be able to discuss what I took away from the reading in such a way that entrepreneurs can see angel investing and the many aspects of it from an angle that helps them grow.

Now, the introduction to the valuing section really caught my attention because when I think about the exchange in investing, I always think about money. However, Amis and Stevenson, make the point that it isn’t always money that is on table, or at least not always just money. Your venture is worth more and is more than just cash.

I really want you as the entrepreneur to look at valuing your venture before you ask any investor to place a value on it. What is your venture worth and not just in monetary terms? According to The Angel Investor Report the start-up valuation of your firm depends on a few different things.

Your team and you:

Do you and your team have experience and education that relates to your start-up, how much?

Do you and your team have important skills in a variety of areas?

Do you have the ability and the flexibility to make changes, grow as a person, or shift and adapt?

Do you have a solid business plan, is everyone seeing eye-to-eye when it comes to goals and where the venture is headed?

The product/service:

What is your product/service worth?

Can you grow your product/service, is it scaleable?

Revenue:

Do you have strong and reasonable projections?

Is there profit potential along with growth potential?

Is there existing cash flow?

Do you have a strong understanding of your numbers and data? Can you extrapolate what that data means?

Customers:

Are you creating a solution for a problem?

Is there a market for your product/service?

Is that market sustainable?

What differentiates your product/service in the eyes of customer?

The industry and the kind of market you are functioning in:

Do you understand your market or industry?

Are there limitations to growth within your market?

What are the industry or market projections?

Competition:

Who is your competition?

What is your competitive advantage?

What does a future scan of your market or industry reveal?

What are other similar ventures valued at in your industry?

Is the market in your industry saturated?

Geography:

Is your venture appropriate for its location?

Is there a potential for a geographic infiltration by competitors or start-ups like yours, and can your venture survive it?

With growth, can you expand into other geographic locations?

The ability to understand your responses to these questions, in depth of course, can help you as an entrepreneur place a value on your venture. Learning and understanding these aspects can really help you to be realistic and even avoid potential pitfalls like overvaluing your venture and not being able to deliver. All in all, it will help you to be prepared for angel investors so that you can be on the same page about the value of your startup.

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

(2010). Retrieved from Angel Investor Report: http://www.angelinvestorreport.com/start-up-valuation.php

 

Angel Investors from the Entrepreneur’s Eye: Evaluating

“In both entrepreneurship and angel investing, there is nothing like doing it.”

To be completely and utterly honest, Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson has been a hard read for me. I have personally found it to be very hard to get into. However, I am all about trying to stay positive and take something away from a journey, even if it’s not something I am 100% interested in. I also want to make sure that any current entrepreneur, future entrepreneur, or student reading my blog can still gain some sort of benefit from reading my posts. That being said there are also some points and takeaways that I think are very read-worthy and interesting.

This blog post is in response to the book’s second fundamental on early-stage investing. Evaluating.

In my reading of articles on angel investing, there is an overwhelming consensus that one cannot, with great certainty, tell whether a venture will be successful or a total flop. Well, of course not. However, with experience and attention to certain pertinent elements, investors can make educated decisions and moves. What does that mean for us, the entrepreneurs looking for capital? As I mentioned before, it is so important for us to understand both sides of the coin so that we can be ready and set to display and provide what it is that successful and willing angel investors are looking for in the evaluation phase.

“It is extremely important to do your own due diligence…there are a lot of people who can write a $100k check without thinking twice.”

According to Entrepreneur VIP Contributor, Murray Newlands, there are five things that an investor wants to know before signing a check.

1. They want to know your numbers, your business’ financial performance. Entrepreneurs should be prepared to not only present and provide numbers, but also be able to explain them and answer questions on the data.

2. They want to see that you have background and experience in your industry. They are interested in the You, the entrepreneur and the important figures in your organization. Emeritus Professor William Sahlman of the Harvard Business School developed a framework, The Harvard Framework, that focuses on a few different elements that angel investors should focus on in the evaluation phase. He argued that most business plans spend a ton of time on the numbers but did not spend enough time on what really is important to investors, the people.” He said, “When I receive a business plan, I always read the resume section first. Not because the people part of the new venture is the most important, but because without the right team, none of the other parts really matters.”

The “people” part of the evaluation step, is what really caught my interest. It is so important for us as entrepreneurs to understand our strong points, what we have to offer, and also where we need to grow to be the very best. The entrepreneur’s personality is just as important as the product, in my opinion. In many cases consumers fall in love with a brand or a company because of the people behind it. Being able to connect with others is very important as an entrepreneur. We should also be able to express and articulate our ideas, show our passion, and be both kind and honest. If you don’t believe me about personality being important to investors, just watch a couple of episodes of Shark Tank on ABC. The “sharks” get really disgusted by entrepreneurs who have a horrible way of dealing with others or who are rude during the presentations or Q&A. If people do not like you, it may not matter how AMAZING your product is, they will not want to deal with you or invest in your plans and ideas.

“An A-quality man with a B-quality project, but not the other way around.” -General Georges Doriot

3. Your company and your ideas should be unique. By being able to prove that your products and business have concepts that set them apart, that you have differentiators and competitive advantages, you can help an investor see the value in signing that check and taking that chance on you over someone else.

4. You should have an effective business model that makes sense and is feasible. Your business plan should be a solid one that answers the important questions. It should address market specific topics and show business opportunity. Is your business scalable, is there growth potential?

5. It is not unusual for angel investors to go after ventures that provide solutions for problems in larger target markets, according to Newlands. This is where having a competitive advantage and solid branding comes in. If the market is large and you can have a big significant impact in the market, then investors will see the value proposition at hand.

With these thoughts in mind, where can you grow to help people want to invest in you, your product, and your future?

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

Newland, M. (2014, June 5). 5 Things Investors Want to Know Before Signing a Check. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/234536

Torres, N. (2015, 06 August). What Angel Investors Value Most When Choosing What to Fund. Retrieved from Harvard Business Review: https://hbr.org/2015/08/what-angel-investors-value-most-when-choosing-what-to-fund

 

Future Scanning: Esports and the Casino Industry

For years, experts in the casino industry have attempted to understand what the future of casinos and gambling will look like. As the number of Baby Boomers and Generation Xers customers, the majority of heavy spenders in the gaming industry, continue to dwindle over the coming years, many wonder what will draw younger generations in to fill their absence and spend money. The biggest focus and research has been directed at the Millennial Generation.

Millennials are not attracted to gambling in the same ways that their parents and their grandparents were and casinos are continuously trying to figure out what will bring them in and get them spending more money. There has been talk of interactive gaming, gaming that relates closely to video gaming, skill-based gaming, and more. [1]

Though electronic table games are not new to the industry, many casinos are increasing the number of these types of games on their gaming floors. These games can be less intimidating and often have lower betting minimums which may help attract younger players. The games also allow players to make multiple bets on multiple games at the same time, increasing the opportunity for revenue for the casino. [2]

New skill-based games are emerging as well. They allow players to compete against one another and challenge them based on skill level. Though not quite popular yet, as these types of games are still fairly new to the industry. [2] Millennials, in general, are not attracted to the traditional slot machine. The generation is big on online gaming and skill-based games. They prefer a much more social setting to be entertained in as opposed to sitting by themselves in front of a machine. Game makers are also looking for ways to allow players to use their cell phones to be able to see where they and other players rank in competition. [3],

For the past few years, there has been much talk and buzz about Esports. Esports are video game competitions for money. This type of gaming is expected to grow over the coming years. [2] It is an attractive concept to millennials who grew up with video games and even around competitive video gaming.

As casinos continue to try to plan for the future, gamblers may see an increase in new technology on gaming floors, including virtual reality installations and more competitive, skill-based gaming. [2] According to the CEO of MGM Resorts International, James Murren, the slot floors of today are not going to be the slot floors a decade from now. Even the look of slot machines will change, in fact, they already are changing. Many game designers are crafting machines that look more sleek, more digital or computer-like, and to resemble video games. CEO of Gamblit Gaming, an innovation gaming company, Eric Meyerhofer, the future casino floor will look more like an adult arcade. Casinos can already be seen transforming their gaming floors, taking out old gaming, adding new games and features that will hopefully attract the younger generation. Meyerhofer also predicts that gaming will become a more social atmosphere and incorporate gaming with non-gaming entertainment, instead of the traditional practice to keep them separate. [3]

In order to remain competitive and relevant, casinos must focus on attracting all generations and understand the differences in what attracts each. [3] The industry must be fluid and accepting of new technology, but also find the balance between attracting the new customers but also retaining the old customers simultaneously. The future of gaming is sure to change and shift in the coming years and decades, especially as new technology and types of gaming emerge.

[1] Barlow, K. (2018, January 04). Millennials and the Gaming Industry in 2017: New Directions Take Hold. Retrieved March 02, 2018, from https://www.casino.org/news/millennials-and-the-gaming-industry-in-2017-new-directions-take-hold

[2] Meltzer, M. (n.d.). What could the casino of the future look like? Retrieved March 02, 2018, from http://www.travelvegas.com/blog/future-vegas-casinos/

[3] K. H. (2017, August 31). The Casino Floor of Tomorrow: Attracting Millennials to Casinos. Retrieved March 02, 2018, from https://www.casino.org/blog/the-casino-floor-of-tomorrow-attracting-millennials-to-casinos/